Federal Proposal of SHCP on Economics Policy General Criteria 2018

The federal Government almost a month ago presented its economic package (2018), which can be summarized in an inertial one to 2017, where it does not highlight relevant changes or incentives to the economy. But this package was formulated and presented not only before the September 19 earthquake, but also the great amount of citizen requirements to change budget allocations to political parties.

Not only this, but also, it does not take into account the tax reform proposed by Donald Trump in the USA, which if approved as presented, would pose problems of competitiveness and serious tax loss for Mexico and in particular many Mexican companies with interests and investments in the USA, and American companies with investment in Mexico.

In any case, and in principle this package has reasonable bases from the inertial optics, but obviously it is expected that negotiations from the Ministry of Finance (SHCP) and of course our representatives in Congress, can carry out to lead to a better scenario for this package, which, even when it is expected to avoid political intervention in the 2018 election, it can not be dismissed such election to the well-being of Mexico.

Below is a summary of the package and critical approaches.

• GDP growth (GDPg): 2017 2-2.6%, and 2018 2-3% (IMF revised from 0.2% to 1.9%).
• Average exchange rate: 2017 18.10, 2018 18.45.
• MME: 2017 $ 42 dpb; 2018 $ 46 dpb.
• Inflation 2017 5.8%, 2018 3%, according to Banxico (optimistic, IMEF expects 3.8%).
• Public expenditure: 2017 4.97 bpd, 23.4% GDP. 2018 5.20 bp, + 4.5% to 22.8% GDP.
• Public debt: 2016 47.9%, 2017 49.6% GDP, 2018 47.1% GDP, for current credit rating.
• Fiscal deficit: 2% GDP, or primary surplus 0.8% GDP (wo/interest).
• Reduction SHRFSP (debt requirements): 2016 50.1% GDP, 2017 48% GDP; with a primary surplus of 0.4% GDP, Banxico's remaining which drives 1.5% GDP.
• Budget revenue + 3.6% real per GDPg and recent progress.
• There would then be +2.2% real for Expenses.
• They estimate a reduction in the PSFR of 2.9 to 2.5% of GDP, with a primary surplus of 0.9% of GDP, to 47.3% of GDP of SHRFSP 2018.
• Lowering debt to GDP is the fiscal consolidation objective.
• Credit rating. Doubts in PIBg2017 and SHRFSP expected> 50%, above average 10 years.
• Presumption: Increased growth by sector, less external uncertainty and improved efficiency of structural reforms.
• Reduction in GDP from inflation and increase in production. Low debt, and achievement of fiscal targets.
• Possible risks: NAFTA renegotiation, Fed normalization, BREXIT, China deceleration and geopolitical tensions.

To be considered (IMEF through its National Technical Committee of Fiscal Studies, directed by Nora Morales, exposes some points, that in Solo Negocios we interpret and we subscribe ideas):

1. Resources from higher taxes, discourages production and employment and promotes informality. Current high tax burden, and propitious evasion. If US reduces rates there will be loss of competitiveness.
2. Government can choose to increase prices on concentrated goods (gasoline and electricity). But it hits inflation, national production loses competitiveness.
3. Public deficit is financed in debt markets. If it raises and pushes rates, it raises public expenditure for debt service. This raises public deficit, towards a vicious circle, which generates crisis.
4. Control of imbalance by inflation, exchange rate and interest rates. 2018 will be volatile external and internal, and you have to prepare for adjustments.
5. Next administration requires new fiscal reform that improves public bonds, low corporate rate and generalized VAT.
6. In Economic Package 2018 highlights conservative forecasts and planning in public fiscal consolidation.
7. Reference NAFTA; axis of integration MX-US is not only NAFTA, but fundamental structures and demographic synergies, towards political and social values, formalized and augmented, but not generated by the Treaty.
8. Progress in commitment efficiency in 2017, results in strength for the exchange rate, value of investment assets, capital flows and reduction of risk perception.
9. Short term with volatility due to geopolitical tensions and monetary policy of several global central banks.
10. The themes of natural phenomena lay a demand for better reaction and attention from FONDEN (natural disaster fund), perhaps even more resources.
11. The previous theme brought a movement against the contribution of public resources to political parties; but this could bring other problems related to the campaigns funding, which in any case already occur.
12. Finally, the Trump initiative on taxation in the US could provoke (if approved), damage to Mexican competitiveness in general and, if applicable, concrete Mexican tax haven declarations with cross investments between the US and Mexico. A., and Mexico.

For more information, contact us.

Solo Negocios

Financial Division

Phone: +52 (656) 6119768

E-mail: correo@solonegocios.mx